Financial Zip

So you want to enter the crazy and volatile world of the stock market. We have gone over some basics with Understanding the Stock Market. What you now need to know is what is a stock?

Let’s use an example. You have a company that you want to start, and you have no money or very little. There are 2 options you have. You can borrow the money from some one or you can find people to invest. Your company has a sound product and it looks like it will be really profitable. With that you find some investors that give you the money to start your company.

Those investors have just provided you some equity. What they want in return is that when the business is doing well a little bit of the profits. This is really the story of owning stock. You are buying in or investing in a company that you want to be profitable.

Your Piece of the Pie

When you buy a stock you own a small piece of that company. You then become a shareholder or stockholder. The whole point having the stock is that you expect it to go up. You want the value of the company to increase. What is really interesting about stock is the only time the company makes any money is when it issues the stock. The rest of the time it is traded by investors and it is those investors that can dictate the price.

There are different types of investors. Most investors are individual investors that buy and sell stock on there own or through a broker. The other investors are what are called institutional investors. These are huge brokerage companies that buy millions of shares at a time and can really affect the price of the stock.

Types of Stock

Common Stock

Common Stock is pretty common, hence the name. The majority of stock issued by companies is going to be common stock. What types of rights come with common stock? You have the right to vote on the board of the directors, you have the right to the profits of the company in the form of dividends. With each share you own you have a vote. 10 shares, 10 votes. The best thing about common stock as an investment is that it has one of the highest returns on investment. Mostly because there is some high risk involved, but most people who invest in stocks are pretty happy in the long run.

Preferred Stock

Preferred stock despite the name doesn’t have has many rights as common stock. The one thing with preferred stock is that you have the ability to collect consistent dividends for as long as you own the preferred stock. The company does have the right to buy back the stock at any time for any reason and will buy it back at a premium.

Stock Splits

One other thing with that can happen with common stock are stock splits. The reason this happens is that maybe the company’s stock has gotten really expensive so if a stock is selling at $100 and you have 10 Shares. What happens is that price goes down to $50 but the number of shares increases so you have the same amount of money $1000 but now you have 20 shares. In the long run that can be very profitable for you as a stock investor.

How a Stock Gets to Market

Going public, or taking a company public means that for outside investors they have the opportunity to invest in the company. Selling the shares gives the owners access to the capital they need without having to repay it like a loan.

The process of going public is very complicated. Generally the IPO (Initial Public Offering) is written by an investment bank. Recently Visa Credit Card had an IPO 17.9 billion. So when these companies go public they can raise a lot of money. The investment bank will sit down with management and write out the price as to what it will initially go for and that is a general description of how a stock gets to market.

Up or Down

The wonderful thing about a stock is that they do not have a fixed price. They fluctuate according to the supply and demand. What you will generally see is that when a stock is rising in value more an more people are willing to pay the price to buy it. Eventually it will get to a price that investors think is to much and will start to sell off the stock. These factors contribute to the value of the stock.

There are a lot people out there that think predicting the value of the stock is just as good as winning in Vegas. Not true. As we will discuss in a later article there a tools like charts, company reports, and other resources that can allow you to gauge the health of the stock and predict its short and long term movement.

Recap

• Stock means ownership. As an owner, you have a claim on the assets and earnings of a company as well as voting rights with your shares.

• You can lose all of your investment with stocks. The flip-side of this is you can make a lot of money if you invest in the right company.

• The two main types of stock are common and preferred.

• Stock prices change according to supply and demand. There are many factors influencing prices, the most important of which is earnings.

Next: Fundamental Analysis

Stock Market Basics
1. Understanding the Stock Market
2. Equities ( The Basics of Stocks)
3. The Fundamentals
4. Advance Fundamentals
5. Charting and Technical Analysis
6. Virtual Trading
7. Finding a Company You Like
8. Buying and Selling Stock
9. Trading Systems and How to Create One
10. Market Cycles
11. Sectors